Retail inflation at record low of 2.18% in May

The Narendra Modi government has successfully managed to rein in retail inflation. Retail inflation slumped to record low of 2.18 per cent in May driven by sharp drop in kitchen staples like vegetables and pulses, strengthening government's case for lowering of interest rate by RBI.

For the first time since January 2012, food prices saw deflation in May (-1.05 per cent) and the prospect of good monsoon rains is likely to keep food inflation in check.

The Consumer Price Index (CPI) based inflation strengthened the finance ministry's stand that Reserve Bank of India's forecast on price rise had large errors and there was a case for cutting interest rate to help private investments to pick and boost economic growth.

Retail inflation was the lowest since the government started publishing a wider CPI data in 2012.

Consumer prices rose 2.99 per cent on year in April and 3.81 per cent in March.

Clothing, housing, fuel and light also saw lower inflation rate in May while prices of vegetables declined by 13.44 per cent and that of pulses and products by 19.45 per cent.

Earlier this month, RBI left key interest rate unchanged as it wanted to be more sure that inflation will stay subdued.

This left finance ministry fuming as it felt that inflation was consistently low warranting a rate cut.

CPI inflation in May is at the lower end of the RBI's projected headline inflation band of 2-3.5 per cent in the first half the current fiscal.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said though inflation is going to remain low and well within the comfort zone of RBI, probability of large policy rate cut is low.

"At best, we can have 25 basis point rate cut in the remaining FY18. However, its timing will be data dependent," he said.

On CPI inflation numbers, he said while pulses deflation is more structural in nature, the vegetable deflation could be cyclical and can change its course in near future due to monsoon related aspects.

"While decline is food inflation is good news for policy makers and consumers, it is not very good news for farmers and especially vegetable and pulses farmers.

"Prices of pulses in some harvesting areas are already lower than the MSP and thus farmers are not getting full benefit of increased production leading to farmer unrest and increasing clamour for farm loan waiver," he said.